Application fee

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This is a charge for processing a loan application. The application fee may be refunded when the loan closes, or it may be part of the total loan charge. It costs lenders money to start a loan, whether it closes or not. So some charge an application fee to cover at least some of their costs if someone switches lenders after applying. You won’t get it back if you change lenders.
For this reason, be advised, that it’s good to shop rates and compare costs before committing to a lender and applying for a mortgage. If you don’t like the idea of a non-refundable application fee, choose a lender that doesn’t charge one.

Underwriting/processing fee

A mortgage application can involve hundreds of pages of documentation, much of which can now be obtained electronically by the lender with client approval. This material must be analyzed and verified for the loan to be approved. The underwriting fee represents the lender’s cost to process the mortgage. This fee is often wrapped into a single origination charge. You may not see a separate line item for it.

Lock-in fee

When an interest rate is locked for the standard 30-day period, it usually doesn’t cost anything. There may even be a discount in the loan fee or interest rate if it is locked for seven or 15 days. CAVEAT: The shorter lock won’t help if you  cannot close before it expires.
For those who want to lock for longer periods, there is often an upfront charge. That’s because the lender has to pay to tie up the money for an extended time, and can lose if the loan doesn’t close. 

Points

A point is simply 1 percent of the loan amount. Origination fees are often expressed in points. 
Then, there are discount points. Paying discount points gets your client a lower interest rate. For this reason, mortgage insiders call paying points for a lower mortgage rate “buying the rate down.”
Discount points are negotiable, and may or may not be a good deal. A point is money spent at closing. Once spent, the money is gone. There is no refund. Does it make sense to pay points? That depends on how long it will take to recoup the cost.

 

Break-even: points versus mortgage rate

Typically, a point should be a .125 percent to .250 percent rate reduction for a 30-year loan. If your client takes a $200,000 mortgage, here’s how it might look:
 

• The principal and interest for a 4.5 percent loan at zero cost is $1,1113

• If you pay one point and get a reduction to 4.375 percent, your payment is about $999, and it will take just over 11 years to recoup the $2,000 discount point

• But if  you get a .25 reduction for that discount point, your rate drops to 4.25 percent, the payment becomes $984 and the break-even period falls to just over 5 years 

So the decision to pay points or not depends on how long you  plan to keep the mortgage, and if there are better things you can do with your money, like paying off a high-interest credit card or make a high-paying investment.

Appraisal fee

It’s nearly impossible to get a mortgage without some form of appraisal. The cost of a “full appraisal,” in which an appraiser personally travels to the property, inspects it inside and out, and then compares it to recent sales in the neighborhood, has gone up significantly in recent years. Buyers should expect to pay hundreds (or more for luxury properties).
Fortunately, many loans do not require the full treatment. Fannie Mae, for instance, offers an “appraisal waiver” for low-risk transactions. But its guidelines say that most borrowers won’t get waivers. If one lender offers it and another doesn’t, that’s a consideration when you finance.
Instead of appraisals, lenders can use “automated valuation models” or AVMs. An AVM program examines public records or real estate sales in your area and generates an estimated value

Shopping for a mortgage: fees versus rate

The general rule is that the lower the rate, the more one pays for it. So you will want to do a break-even analysis to see if it makes sense to pay more upfront or pay more each month. If you plan to keep the loan only a few years, or don’t know how long they’ll keep it, many experts recommend spending as little upfront as possible. If you have a great interest rate, a long-term fixed loan, and have plans to move in the next decade or so, it may be worth considering more expensive loans with lower interest rates. And if you need a certain rate and payment to even qualify, you may have to pay more upfront to secure it. And by the way, it doesn’t really matter if the lender calls the fees an origination charge, a processing fee, or something else. The bottom line total of the fees is what you should concentrate on. And if you want to make shopping easy, chose one interest rate and ask several lenders for estimates of the cost to get that rate... or decide what closing costs you want to pay and ask for the rate at that cost. This makes comparing rates and costs easier. Alternatively, look at the loan’s APR, this will help to compare loans with different costs and rates.

The  APR (annual percentage rate)

The Loan Estimate form shows two interest rates: the stated rate, which the lender uses to calculate your mortgage payment, and the APR, or annual percentage rate. The APR incorporates the interest charges plus the costs of obtaining the loan. It then expresses this cost as an interest rate. The idea is that you can make a meaningful comparison more easily.

For example, here is how the same loan might look at three different price points:
 

• Stated rate: 4.5 percent, costs: zero, APR: 4.5 percent

• Stated rate: 4.25 percent, costs: 2 points, APR: 4.417 percent

• Stated rate: 4.00 percent, costs: 4 points, APR: 4.583 percent 

In this case, the loan with the lowest rate has the highest APR. It will take a long time to recoup the cost of buying the rate down to 4 percent. The loan with the lowest APR is the second one, the one with 2 points. But is that the best deal? Not if it takes too many years for the monthly savings of a lower payment to cover the higher upfront costs of paying points. As a general rule, if two loans have a similar APR, choose the one with lower costs.

So it is best to run the numbers and see which option is best for you. Or you can contact this lender directly by clicking the button below. Now, using the knowledge from this article you are able to ask all the right questions when applying for a mortgage.   

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